Tan Kin Lian's Blog: Price subsidy for essential products

Tuesday, March 25, 2008

Price subsidy for essential products

A newspaper report explained the difficulty faced in Malaysia about handling price control for fuel and essential products. It appears that price control distorts the distribution of the products and cause artificial shortages.

Is there any other way to provide relief to ordinary people from high prices, apart from price controls?

During war time, the distribution of essential products were done through coupons. This is the rationing system. People can buy the products only through coupons. This system also has its problems. A black market is created for the sale of these coupons.

In today's world, there is a better system to handle this problem. It involves the use of low-cost technology.

Anyone like to suggest what is a workable system?

5 comments:

Tan Kin Lian said...: Here is my suggestion to avoid the use of price control or coupons, which can be abused and result in wastages.

Compute the amount of subsidy to be given to each family. This can depend on the number of people in each family.

If average cost of essentials per person is $X and the cost has increased by y% due to high inflation, the government can give a cash subsidy of y% of $X to each person. The total amount for the family can be credited into the bank account of the head of family.

The family can use the cash grant to meet the higher cost of the essentials.

Actually, the Singapore Government has introduced a similar system through the waiver of conservancy charge and grant.

I believe that a cash grant for each person is a better approach and is probably fairer.; March 26, 2008 8:05 AM
Anonymous said...: Having received the cash grant, smoker buy more cigarette, it increase health hazard and health dollars, polyclinic and hospital will be busy with more cancer patients. Is this productivity?

When I was a volunteer to help the poor in 1990's, temple distribute $100/month to a man (60 years old) without shelter. He immediately spend his money to buy cigarette and NOT food.; March 26, 2008 10:09 AM
Anonymous said...: Thanks for sharing.

How is this different from the recent budget surplus sharing?; March 26, 2008 11:06 AM
Tan Kin Lian said...: Hi Mao,
Some people will abuse the cash grant. I hope that it is a small number.
If you restrict the vouchers to food, they can still use their spare cash to buy cigarettes.; March 26, 2008 11:24 AM
Priyadi said...: direct subsidy on commodities is always harmful, whether it is through coupons, price control or cash distribution. direct subsidy creates dependency, it is very hard to lift that subsidy once it is there. direct subsidy is also prone to be highly politicized (just see malaysia election yesterday, and prepare to watch indonesia's next year). simply promise a subsidy and you will get instant votes, no need to spend a large amount of money on campaigns. it is basically a thinly veiled corruption, you are using people's money on your campaign, and the good thing is that people won't realize it.

it is impossible to stop prices from increasing. we all live on the earth that doesn't expand, yet people breed and our numbers are increasing. the law of supply and demand states that because of that the price of living will increase over time. this is actually a good thing, people will take that into consideration when planning their lives, i.e. we no longer born 6 children per family. direct subsidy gives an impression that life is cheap, while it is actually not. a couple might have 6 children because they think they can afford it. but when the subsidy is lifted, they will become another poor family that need to be supported by the society. once you have 6 children you have to support them, you can't somehow tell your wife "ah, 6 kids are too many, let's have 2 instead and dump the other 4"

so what to do about the increasing prices? nothing can be done about increasing prices, and yes, this includes subsidy, you have to lift that subsidy sooner or later anyway. what every government can do is to provide smoothing to reduce short term price fluctiation using market intervention. buy things while they are too cheap and sell them when they get too expensive.

however, i still think that subsidy is needed for things like education. education gives people real means to cope with increasing prices.; March 26, 2008 1:33 PM